The coronavirus pandemic shakes financial markets all over the globe, some of Japan’s larger corporate pension funds are facing the situation with relative confidence.
Several of the country’s more sizeable corporate pension funds with defined benefit schemes are reasonably optimistic because they have diversified the assets of their defined benefits schemes away from equity and towards other investments. These schemes have broader investment opportunities when compared to defined contributions schemes in Japan, which has allowed these pension funds to diversify into alternative assets.
Japan had 12,847 corporate pension funds as of July 1 2019, according to the Pension Fund Association data. Only 20% had assets under management of more than ¥50 billion ($460.11 million).
The larger corporate pension funds have been decreasing equity-related beta, (the measure of the volatility, or systematic risk, of their portfolio in comparison to the market as a whole) for a long time, according to Masaaki Sakakibara, director and wealth business country leader at consulting firm Mercer Japan. The fruits of those efforts have become more evident as stock market valuations across the world have plunged.
“Most of the corporate pensions allocate 10% to 25% into equity, which is much lower than other pension plans in other developed countries. Instead of them taking equity beta, they tend to prefer to deploy their money into income-driven asset classes such as bonds, loans, real estate and private debt,” Sakakibara told AsianInvestor.
Despite the pension funds’ relatively lower exposure to equities, the recent market drops will have had a large short-term impact on Japanese corporate pension funds. This has been exacerbated by the fact the stock drops took place largely during March.
“For most of the corporate pensions, end of March is also their fiscal year end. This is bad timing. They need to revisit [their] asset assumptions and review funding status,” Sakakibara said.
He said that Mercer generally recommends rebalancing assets across global markets, in a manner that carefully considers each client’s specific portfolio situation.
PROS AND CONS
Several investment managers in Japanese corporate pension funds told AsianInvestor they have been adjusting their investment portfolios to account for the possibility of a recession.
But while many see investment challenges, others see opportunities.
One of the latter is Yoshi Kiguchi, the chief investment officer (CIO) of the Okayama Metal & Machinery Pension Fund and West Japan Metal & Machinery Pension Fund. Kiguchi is fairly well known in Japanese investing circles for having allocated around 90% of his fund’s combined $1.2 billion asset under management to alternative assets, but he now sees a chance to move back into recently corrected equities.
“We seek to restart the [fund’s] listed equity allocation gradually from 1% to around 16%, since we had sold almost all listed equity in 2019,” Kiguchi told AsianInvestor, referring to the general drop in stock markets since the start of 2020.
He said that he is particularly eyeing Chinese long- and short-term equities, as he sees the country’s stock markets to be very inefficient market in terms of valuations. On the other hand, Kiguchi expects to allocate less to credit markets and favoured illiquid assets such as alternatives . He said this is an attempt to “avoid the bubble” in the asset class, referring to the increasing demand for such assets from institutional investors across the world.
Alternative investments such as real estate and private equity are proving to be a more challenging area in which to invest for other reasons too. Pension funds typically need to invest new asset allocations into the investment vehicles of the specialist fund managers. However, it’s become a challenge to meet these managers directly to learn more about them and the specific vehicle’s strategy, according to Hiroshi Sumiya, managing director and director of investment at Aisin Employees’ Pension Fund (Aisin).
“We need to have conference calls with asset managers instead of face-to-face meetings,” Sumiya told AsianInvestor.
He elaborated that Aisin expects to maintain its investment strategy according to its policy asset mixture. The fund invests roughly 55% of its portfolio into 55% fixed income, 30% in alternatives and 15% in equities. It reviews this every five years, and last did so in 2017.
Sumiya declined to reveal his fund’s current total assets under management. However, Sumiya’s predecessor Hisashi Hatta told Asianinvestor in July 2019 that the Aichi-based fund, which manages the pension savings for employees at auto parts industrial manufacturer Aisin Group, had ¥205 billion ($1.9 billion) in pension savings.
NEGATIVE RETURNS EXPECTED
As events stand, nobody is sure how protracted the impact of the coronavirus pandemic will be on the world’s financial markets.
Under current economic projections, the average Japanese defined benefit pension scheme could suffer a negative 3% to 7% investment performance during the period the coronavirus pandemic continues to influence markets, said Konosuke Kita, director of consulting at Russell Investments in Japan.
“They have around 20% surplus against “actuarial liability”, so they are supposed to keep surplus. We recommend our clients a rule-based rebalance – in other words to buy equity. Formerly they hesitated but now it is easier to buy,” Kita told AsianInvestor, reflecting the views of Kiguchi.
He pointed out that many corporate pension funds had been concerned about the formerly high valuations of equity markets in particular, but also bond markets, and that many kept conservative investment strategies or asset allocations. But following the recent market dislocation, Kita believes Japanese pension funds may now have a good short-term opportunity to invest in credit.
However, Kita was less forthcoming on exactly where to aim, noting only that "currently we are not able to evaluate which areas could be promising".